# Homework solutions to chapter 10

Document Sample

```					        Chapter 10
Question 18

Heer Enterprises needs someone to supply it with 160,000 cartons of machine
screws per year to support its manufacturing needs over the next five years,
and you have decided to bid on the contract. It will cost you \$840,000 to install
the equipment necessary to start production; you'll depreciate this cost straight-
line to zero over the project's life. You estimate that in five years, this equipment
can be salvaged for \$60,000. Your fixed production costs will be \$290,000 per
year and your variable costs should be \$8.50 per carton. You also need an initial
investment in net working capital of \$75,000. If your tax rate is 35% and you
require a 12% return on your investment, what bid price should you submit?

Input area:

Quantity                          160,000
Installation costs           \$    840,000
Pretax salvage value         \$     60,000
Fixed costs                  \$    290,000
Variable production cost
per carton                \$        8.50
Net working capital          \$      75,000
Tax rate                               35%
Required return                        12%
*Depreciation staight-line
over life                                5

Output area:

Aftertax salvage value       \$ 39,000.00
Initial cash outlay          \$ (915,000.00)
NPV w/o OCF                   (\$850,313.34)
Necessary OCF                  \$235,885.20
Net Income given OCF            \$67,885.20
Sales per year               \$1,922,438.77

Bid price                    \$       12.02
160,000 cartons of machine
over the next five years,
cost you \$840,000 to install
depreciate this cost straight-
t in five years, this equipment
n costs will be \$290,000 per
arton. You also need an initial
r tax rate is 35% and you
price should you submit?

93600                            1101240

126000
655200 Annual depreciation = \$840,000/5 = 168,000
42000 Total Costs = \$290,000 + (\$8.50 * 160,000) = \$1,650,000
201600
Annual depreciation = \$655200/7 = 93600
7.14 Total Costs = \$201600 + (\$7.14 * 126,000) = \$1101240
63000
0.31
0.15

7

28980
718200
(\$683,621.31)
\$164,315.47
\$70,715.47            OCF = NI + Depreciation or NI = OCF - Depreciation
1297326.184            Net Income = (Sales - Costs - Depreciation) * (1-T)
Sales = NI/(1-T) + Costs + Depreciation
10.29623955
381306600
84548      26209.88     58338.12   120438.12    19251   241500
1276500                     421935    -1212316            255300   79143
421935
421935
421935
421935
443449
22.15%
EAC=Npv/Pvifa                       PVIFA=
235200      -257600 (\$390,714.53) 3.92238013
-35840
-35840
-35840              (\$99,611.59)
-35840
-35840
-35840
-13440
(\$133,114.53)

```
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